Written by Geoffrey Kaufman, CPA, MBA
Short-term rental losses can still be treated as non-passive under the right circumstances. Recent tax developments have not eliminated the strategy, but they have made documentation, material participation, and consistency across the tax return even more important. In addition, the 2025 Act amended IRC §168(k) to restore a permanent 100% bonus depreciation allowance for qualifying property acquired and placed in service after January 19, 2025. IRS Notice 2026-11 provides interim guidance on how taxpayers may apply those statutory changes pending forthcoming regulations. When applicable, this can significantly increase deductible losses if the short-term rental strategy is properly structured and supported.
Quick answer
Short-term rental losses can still be treated as non-passive in 2026, but recent tax developments have made documentation and material participation more important than ever. While 100% bonus depreciation may increase the size of the deduction, taxpayers still need to meet the short-term rental rules and support their position with strong records.
For real estate investors, the takeaway is clear: the opportunity remains, but the room for sloppy execution is getting smaller.
In this article, we’ll break down the recent tax developments affecting short-term rental losses, explain what they mean in practice, and highlight the steps taxpayers should take to strengthen their position.
In general, rental activities are passive under Section 469 unless an exception applies. A short-term rental may fall outside the definition of a rental activity if the average period of customer use is 7 days or less, or in some cases 30 days or less when significant personal services are provided. Even then, the taxpayer still must satisfy a material participation test for losses to be treated as non-passive.
That matters because non-passive losses may offset wages, business income, or other ordinary income. This is why the strategy is often paired with cost segregation planning, broader tax planning services, and other planning strategies for real estate investors. Trout has also previously covered both the short-term rental loophole and passive activity loss rules for real estate investors.
One of the biggest planning developments is the restoration of 100% bonus depreciation for eligible property acquired after January 19, 2025 and placed in service in 2025 or later. For investors, using a cost segregation study can sharply increase first-year deductions.
That said, bonus depreciation changes the size of the deduction, not whether the loss is passive or non-passive. Taxpayers still need to meet the short-term rental exception and support material participation with credible records.
A recent Tax Court case, Mirch v. Commissioner, T.C. Memo. 2025-128, reinforced that short-term rental tax strategies still depend heavily on substantiation. Even when the law is favorable, taxpayers can lose if they cannot prove material participation with credible, contemporaneous records.
Practically, that means reconstructed logs, vague summaries, or unsupported hour estimates are far less persuasive than contemporaneous time tracking tied to bookings, invoices, cleaning schedules, guest communications, and vendor coordination.
Despite online claims to the contrary, the core framework for short-term rental non-passive loss treatment remains intact.
As of 2026:
A property does not qualify for this strategy just because it is listed on Airbnb or Vrbo. The average customer use test still has to be calculated correctly and supported.
This is one of the biggest risk areas. Daily or near-contemporaneous logs are far stronger than reconstructed records created later during return preparation or an audit. Daily tracking is increasingly a defensive necessity, not just a best practice.
Not every hour connected to the property counts toward material participation. Investor-type activities, certain educational activities, and poorly documented administrative work can all create audit problems.
Using a property manager does not automatically kill the strategy, but it can make it much harder to prove the taxpayer did more qualifying work than anyone else involved in the property.
If the position taken across the return is not internally consistent, that inconsistency can invite scrutiny. The short-term rental analysis should align with depreciation treatment, activity classification, and the overall narrative of the return.
Track the date, task, time spent, and property involved. Tie entries to bookings, invoices, guest messages, and vendor coordination whenever possible.
Do not assume last year’s treatment still works this year without reviewing the facts. Average stay, services provided, and participation patterns can all shift.
A cost segregation study can be extremely valuable, but only if the resulting losses are usable. This planning should be evaluated holistically so the taxpayer understands not only the size of the deduction, but also whether the loss is likely to be usable. For more insight, read Trout’s article on cost segregation study considerations for real estate investors.
The treatment on Schedule E, supporting schedules, and related tax positions should align. Consistency does not eliminate audit risk, but it does reduce unnecessary exposure.
The short-term rental non-passive loss strategy is still available under current law, and the return of 100% bonus depreciation may make it even more attractive for eligible investors. But recent developments reinforce an important point: this is no longer a strategy that should be implemented casually. If the facts are strong and the documentation is disciplined, the opportunity remains. If not, the risk of reclassification is much higher.
If you are evaluating whether your short-term rental losses will hold up under scrutiny, Trout CPA can help you assess eligibility, coordinate cost segregation planning, and strengthen the documentation behind your position. Learn more about Trout’s tax services, explore our real estate insights, or contact our team to start a conversation.
Yes. The strategy still exists, but taxpayers need to satisfy the applicable short-term rental rules and prove material participation. Recent developments have increased the importance of documentation, but have not eliminated the strategy.
No. Bonus depreciation can increase the deduction, especially when paired with cost segregation, but it does not determine whether the loss is passive or non-passive.
Not necessarily. In the right circumstances, a short-term rental can avoid treatment as a rental activity for Section 469 purposes, but material participation still has to be proven.
You should maintain daily or near-contemporaneous logs showing what you did, when you did it, how long it took, and how the activity connects to the property. Supporting documents such as booking records, invoices, and communications strengthen the position.
Geoffrey Kaufman, CPA, MBA
Geoff joined Trout CPA in August 2020. He graduated Summa Cum Laude from Lebanon Valley College's 3+1 Accelerated Bachelor of Science in Accounting and MBA Program. He currently serves on the firm's Construction & Real Estate, Manufacturing & Distribution, and Estate & Trust Practice Groups. As a Senior Associate, Geoff assists with attest services, including financial statement preparation, and provides tax planning and preparation support for individuals and corporations. Additionally, Geoff specializes in helping real estate investors navigate the complexities of their financial and tax obligations. In his free time, Geoff enjoys spending time with family and friends, hiking, going to the beach at Wildwood Crest, and volunteering in the community. He lives in Lancaster County with his wife and daughter.